Markets Look to Data for Direction as Gold Bulls’ Fightback Stalls and Fed Rate Hike Risk Looms

Lower U.S. Treasury yields have reduced the opportunity cost of holding gold, helping the metal stage a short-term recovery. Yet the market remains finely balanced between opposing bullish and bearish forces. Strong expectations of a December Federal Reserve rate rise, a U.S. dollar close to its lows, shifts in capital between risk assets and occasional geopolitical disruptions are together curbing the scope for further gains.  

During Thursday’s early Asian session, gold relinquished the gains made on Wednesday, exposing the fragility of the recovery. Confidence among buyers remains subdued, while participants favour waiting for important economic releases and the policy meeting before committing themselves. For the immediate outlook, attention is centred on the psychological level around $4,100.  

A decline of 14.6 basis points in the 10-year Treasury yield last week, its largest weekly fall in eight months, set the backdrop for gold’s recovery from Wednesday’s lows. Falling U.S. Treasury yields were the most immediate driver of that rebound. The decline suggested that unease over rising financing costs for AI-related companies had briefly subdued appetite for risk, directing safe-haven demand into U.S. Treasuries and lowering yields. Because gold pays no interest, a reduction in nominal yields makes it less costly to hold relative to interest-bearing assets, increasing its appeal.  

That support from bonds was not consistent, however. A $13 billion auction of 20-year Treasury bonds produced a yield above the level markets had anticipated before the sale, after which yields climbed away from their intraday lows.  

For gold, medium-term sentiment is still shaped chiefly by the Federal Reserve. The October 27–28 policy meeting, alongside next week’s U.S. Personal Consumption Expenditures (PCE) report, will be scrutinised by investors seeking indications of where interest rates are heading. One 25-basis-point increase remains the market expectation for this year, though its timing may slip to December; the prospect of an October rise has diminished markedly. Expectations for gold point to trading within a range over the short term, against an underlying downward bias.  

An unchanged rate in October, with a possible increase in December, is the scenario markets now largely accept. Although an October pause would provide temporary respite for gold, a 90% probability of a December rate rise continues to restrain the rebound. With Fed Chair Warsh unlikely to offer firm indications of future policy changes, investors will need to draw their conclusions from the language used at the meeting and the PCE figures. The resulting uncertainty is itself likely to keep gold buyers from taking aggressive positions.  

Market Insight: Gold Faces a Test of Support

Gold’s ability to retain support around $4,100 and rise to test $4,150, rather than succumb to renewed pressure from expectations of higher rates, hinges on a combination of developments. Among them are the language of the Fed’s policy statement and the U.S. PCE figures, together with whether U.S. Treasury yields fall further and the dollar index drops below its nearly three-week low. Any breakthrough in Russia–Ukraine peace talks and any substantial escalation in the Middle East will also help determine the outcome.